“Focus on quality. Anticipate four structural trends that will dominate our lives in the years to come. Hyper-growth stocks are not recommended at this time because of the sharp rise in valuations. And be cautious about equity and bond markets.”
This is the message from Jan Viebig, Chief Investment Officer of Oddo BHF AG, who said that he is pleased that the four multi-asset funds in the Polaris range are now available on the Belgian market.
Five criteria and four trends
Viebig explains that the equity portion of the four Polaris funds is invested exclusively in high-quality companies that meet five criteria.
“Firstly, they must be capital efficient and therefore have, among other things, a high return on equity (ROE) and return on invested capital (ROIC).”
“Secondly, they must have a clear competitive advantage, as this is the only way they can remain capital efficient. Third, we only invest in companies that show structural growth.”
“Fourthly, they must have a high ESG score. We believe that a strong ESG focus will improve the average risk/return ratio. Finally, we look at whether companies that meet these four criteria are attractively priced.”
He pointed out that a stock like Tesla would never make it into the portfolio because it is far too expensive. ASML, on the other hand, is in the portfolio because it performs well on all fronts. “It generates economic profits because the return on investment is higher than the cost of capital, which is ultimately the ultimate driver of a long-term stock.”
At the same time, according to Viebig, it will be important to ensure that these quality stocks benefit in some way from four key trends in the coming years.
“The most important is undoubtedly digitalisation and artificial intelligence. Data-driven computers will be the biggest change in our lives,” he said. “Changing consumption patterns, especially among young people and changing payment systems are also important.”
“The ageing of the population is the third trend from which pharmaceutical companies should benefit greatly. And the fourth trend is the growth of the middle classes in emerging countries. You don’t even have to invest in them directly, through LVMH for example, that’s also possible,” he said.
“There are between 30 and 50 stocks in the various portfolios,” continued the CIO. “We think that beyond 30 stocks, the additional benefit of diversification becomes weaker.”
More cautious
“Today, we have become a little more cautious because the average valuation of the equity markets has become too high,” Viebig stressed. “That doesn’t mean we are pessimistic because, as a long-term investor, it is still a good time to invest in equities, especially compared to fixed-income investments.”
“However, we avoid so-called hyper-growth companies because they have become very expensive,” he said. “Paypal is a good example: it’s a great company, but we’re becoming a bit more cautious given the rise in valuation and are gradually increasing the stock.”
Viebig said he sees several risks to the markets and the high average valuation is one of them. Equity markets are trading at a price-to-book ratio of 4:5, which he said is very high.
“Low interest rates are the reason for this,” he explained. “We also see a lot of overvaluation like SPACs and the crypto-currency market. Bitcoin is a bubble, just like in the days of the tulip mania. By the way, bitcoin can only be used for speculation. Moreover, several sentiment indicators are far too high and fewer and fewer institutions are hedging, a sign of the times. That is why it is more important than ever to invest in quality.”
“On the bond front, the Polaris funds currently have a very short duration,” he continued. “We don’t want to take too much risk in this area, which only serves to stabilise the portfolios. We therefore invest almost exclusively in companies with an investment grade rating, on which we get almost no return. Today, we remain convinced that equities are the best. That’s where we take our risk, not in the bond markets.”
The CIO said that the drift of inflation is the reason for this caution and short duration.“We believe we are seeing the strongest economic recovery since the 1960s, driven by extremely supportive policies. The economy will overshoot, pushing US inflation above 4%.”
But next year, he said, inflation is already expected to fall again thanks to, among other things, technological progress, demographic changes due to an ageing population and excess savings.
Finally, it is clear to Viebig that the Federal Reserve is behind the curve. “In our view, the Fed funds rate should be 150 to 200 basis points higher today. However, the Fed is not reacting because the labour market situation has not yet normalised. After all, there are 8 million fewer jobs than before the Covid-19 pandemic. So the Fed itself has extra time.”
Polaris
The Polaris range consists of four different multi-asset funds, each focusing on a different risk profile. The Oddo BHF Polaris Moderate was launched in 2005 and has EUR 1.221 billion under management.
The equity exposure varies between 0% and 40%. The other three entered the European market (but not Belgium) in 2007, are smaller and can invest more in equities (see table below).
The objective of these funds is to be among the 25 strongest in their respective categories over a period of 1, 3, 5 and 10 years.
Since March 2020, there has been strong outperformance due to the gradual but rapid increase in equity exposure after the market collapse due to the Covid-19 crisis.
